CHP 10

Question 1

Contract design factors

Answer 1

• Customer needs and interest
• Characteristics of other stakeholders involved in contract design
• Risk appetite of the parties involved
• Level and form of the benefits
• Options or guarantees
• Discretionary benefits
• Benefits taken early / discontinuance benefits
• Contract terms and conditions
• Profitability
• Marketability
• Competition
• Statutory / regulatory requirements
• Financing requirements
• Premium / contribution patterns
• Charges vs expenses
• Extent of cross subsidies
• Consistency with other contracts
• Admin systems
• Accounting implications

Question 2

1. Parties involved in contract design

Answer 2

Parties involved are:
•	Client (s)
•	Client’s customers
•	Actuaries
•	Lawyers
•	Accountants
•	Financial brokers
•	Administrators

Question 3

1.1. Customer needs and interests

Answer 3

Clients and their customers want financial structures that meet their needs in a cost-effective manner.

Question 4

The client’s actual needs will be influenced by:

Answer 4

• The chosen market
• The capital available
• The expertise available

Question 5

The client’s customer’s actual needs will be influenced by:

Answer 5

• Capacity to pay
• Risks to be covered
• Benefits that are needed at different times in the future
• Attitude to financial risk

Question 6

1.2. Other stakeholder involved in contract design

Actuaries

Answer 6

Initial costing of financial structures and subsequent determination of needed provisions for future liabilities.
Involved in the design through assessing impact on cost and reserving implications of modifications to benefit design.

Question 7

1.2. Other stakeholder involved in contract design

Lawyers

Answer 7

Drafting of contracts supporting the financial structure to ensure insurers are not exposed to risk of providing more benefits or entering into greater risks than intended.

Question 8

1.2. Other stakeholder involved in contract design

Accountants

Answer 8

Ensure that financial structures properly accounts for income and outgo.

Question 9

1.2. Other stakeholder involved in contract design

Financial backers

Answer 9

Want regular reports demonstrating proper stewardship of the finance provided.

Question 10

1.2. Other stakeholder involved in contract design

Administrators

Answer 10

Will administer the financial structures, the more complex the structure, the more expensive the admin. The more complex the structure the higher the operational risk – both in admin time and error correction.

Question 11

1.2. Other stakeholder involved in contract design

Sales and marketing

Answer 11

Need training, the more complex the financial structure, the more expensive the training.
Marketing teams can provide insights into the target market in the design process.

Question 12

2. Risk appetite – risk aversion

Answer 12

The financial structures must meet the risk profile of the intended purchaser, and the risks are clearly explained.
Sales will be successful if the product can be sold to a wide range of risk appetites. For savings, this can be achieved by offering a wide range of investment choices. Having a range of funds available can also accommodate changing risk appetites as time passes, e.g. a client grows older.
General insurance products normally deal with clients’ risks appetite through the range of risks insured.

Question 13

3.1. The level and form of benefits

Answer 13

Level and form of benefits may vary according to:
• Client’s needs
• Risks to be covered
• Client’s ability to pay

Question 14

3.2. Options

Answer 14

These could be with respect to:
•	Payment of premiums
•	Benefits
•	Use of the contract proceeds
•	Other items

Question 15

Guarantees

Answer 15

Could guarantee minimum payouts, investment performance, surrender values etc.

Question 16

The cost of options and guarantees

Answer 16

The cost must be added to the premium, there will be more stringent regulatory requirements also.

Question 17

5. Financing considerations

Answer 17

Capital requirements depend on the riskiness of the benefits promised.
Some attractive contracts may require too much capital to be held, this will impact profit. This may be the case where regulatory capital requirement is assessed on a basis that is inconsistent with economic capital requirements.

Question 18

5.2. The method of financing the benefits to be provided

Answer 18

Where there is a period of time between a financial structure being set up and the benefits actually being provided, there is a choice as to how and when monies should be set aside to pay for the benefits.

Question 19

6.1. Premium / contribution pattern

Answer 19

The more flexibility, the more expensive and complicated the admin, this also have greater marketability and competitiveness.

Question 20

6.2. Charges vs expenses

Answer 20

Charges must cover the cost of setting up and managing the financial structures.
The charges must be able to cover the provider’s expenses.